Chapter 1 - Introduction to Insurance

Question 1

The Law of Large Numbers allows Insurers to:
A. Eliminate large claims.
B. Sell policies in more than one state.
C. Sell different types of insurance policies.
D. Accurately predict future losses.

Answer 1

d. Accurately predict future losses.

Question 2

Which of the following losses is least likely to be insurable?
 A. Predictable loss.
 B. Catastrophic loss.
 C. Measurable loss.
 D. Accidental loss.

Answer 2

b. Catastrophic loss.

Question 3

Each of the following involves pure risk EXCEPT:
 A. Getting sick.
 B. Becoming disabled.
 C. Gambling in Vegas.
 D. Dying.

Answer 3

c. Gambling in Vegas.

Question 4

The cause of the loss is called:
A. A peril.
B. Risk.

Answer 4

a. A peril.

Question 5

Uncertainty of loss is:
A. Insurance.
B. Risk.

Answer 5

b. Risk.

Question 6

The Law of Large Numbers:
A. Prohibits a particular Insurer from issuing more than its fair share of the policies in any particular market.
B. Is used to determine premiums based on historical loss figures.

Answer 6

b. Is used to determine premiums based on historical loss figures.

Question 7

Insurance:
A. Increases risk.
B. Decreases risk.

Answer 7

b. Decreases risk.

Question 8

A risk management technique that transfers risk is:
 A. Insurance.
 B. Risk retention.
 C. Risk reduction.
 D. Risk avoidance.

Answer 8

a. Insurance.

Question 9

Indemnity means:
A. Coming out ahead.
B. Being made whole.

Answer 9

b. Being made whole.

Question 10

The transfer of risk is:
 A. Coordination of Benefits.
 B. Risk avoidance.
 C. Insurance.
 D. Risk reduction.

Answer 10

c. Insurance.

Question 11

Each of the following statements is true regarding the agency relationship EXCEPT:
 A. The agent represents the Insurer.
 B. The producer represents the Insurer.
 C. The broker represents the Insured.
 D. The agent represents the Client.

Answer 11

d. The agent represents the Client.

Question 12

Risk is defined as:
A. Uncertainty of financial loss.
B. Certainty of financial loss.

Answer 12

a. Uncertainty of financial loss.

Question 13

Who sells insurance to a client and owes a fiduciary duty to an insurance company?
A. Broker
B. Agent

Answer 13

b. Agent

Question 14

Each of the following statements regarding insurance is true EXCEPT:
A. It involves the transfer of risk.
B. It involves the Insured paying a premium to transfer all risk to the insurance company.

Answer 14

b. It involves the Insured paying a premium to transfer all risk to the insurance company.

Question 15

Which type of insurance company is owned by its policyholders?
A. Stock Company
B. Mutual Company

Answer 15

b. Mutual Company

Question 16

The main principle of insurance is:
A. Elimination of risk.
B. Transfer of risk.

Answer 16

b. Transfer of risk.

Question 17

Which of the following statements is true concerning the agency relationship?
A. An insurance broker owes a fiduciary duty to one or more insurance companies.
B. An insurance broker owes a fiduciary duty to the client.

Answer 17

b. An insurance broker owes a fiduciary duty to the client.

Question 18

Who helps place a client with an insurance company and owes a fiduciary duty to the client?
A. Agent
B. Broker

Answer 18

b. Broker

Question 19

Which of the following statements is true concerning the producer’s agency relationship?
A. An insurance producer owes a fiduciary duty to an insurance company.
B. An insurance producer owes a fiduciary duty to the Insured (the client).

Answer 19

a. An insurance producer owes a fiduciary duty to an insurance company.